Trends in global markets
AMP Capital has developed a unique view of the global economy. We believe geography is less relevant in an increasingly globalised world, where share market indices are dominated by multinationals operating internationally.
Additionally, the sector a business is in is less relevant in a world where change is accelerating and technological penetration is disrupting all industries, even traditionally defensive ones.
Today, 80 per cent of a company’s value is in intangible assets such as patents, trademarks, copyrights, goodwill, brand, R&D and innovation. This translates into a capital-light, knowledge-based, consumer-services economy. It means to be successful, investors require an understanding of the structural changes and trends in the global economy.
Here, we explore a selection of positive and negative trends that are impacting the global economy.
Investors must understand that societal shifts are having an impact on how people spend. For instance, in China, the US and other developed markets, conspicuous consumption is shifting from products that signify wealth to products that signify a healthy life or values. Since 2011, the spending growth rates by American consumers has doubled on experiences, including education, travel, entertainment, eating and drinking, rather than physical products or ‘things’. This most likely reflects the rise of Millennials, people aged between 15 and 35 years old, as they become the dominant source of incremental consumer spending. It also reflects the spending patterns of Baby Boomers as they retire and spend more time travelling and dining out.
Aside from changes to basic spending patterns, another trend to consider is the rise of Chinese tourism, which is expected to be a dominant theme for years to come. Goldman Sachs estimates that in 2014, 4 per cent of China’s population owned a passport. This figure is expected to triple to 12 per cent by 2025, representing 150 million people with passports. This is still much lower than Japan, with 25 per cent of the population owning passports and the US, where 35 per cent of people have a passport. Two-thirds of current outbound Chinese travellers are Millennials; it is expected that the 74 million Chinese college students graduating during the next decade will substantially boost the number of people who own passports.
The “Amazonification” of retail
Retailing has been transformed over the past decade, with online retailers leading this change. Expect this to continue. For instance, Amazon, which now accounts for more than 30 per cent of US retail growth, has recently announced its intentions to expand into private-label offerings in everything from food to diapers.
Indeed, investors wanting exposure to consumer markets must factor in extraordinarily low barriers to entry. Third-party providers are facilitating capital-light entry into new geographies, part of the reason incumbents are under threat.
Therefore, traditional retailers are likely to continue to suffer as aggressive new competitors, changing customer habits, and emerging technology disrupt the status-quo for bricks-and-mortar stores, convenience stores, and premium-brand products.
On a more positive note, healthcare remains the biggest and fastest growing part of US consumer spending, spurred on by innovation in the supply of life-enhancing products. This is in response to an aging population and increasing efforts to treat conditions with drugs.
From a technology perspective, cloud computing, big data, open-source machine learning, and breakthroughs in semiconductors will transform the technology landscape and drive the rise of the robot economy.
Overall, companies that can reliably generate growth and returns that exceed their cost of capital deserve a high price-to-earnings ratio in a low interest rate world. This is especially the case for less cyclical companies with strong free cash flow and balance sheets backing healthy shareholder distributions.
Headwinds to watch
One of the major shifts happening in investment markets is related to energy. The ‘end of the oil age’, on top of lower overall energy growth due to efficiency, is changing the mix of energy use. This is something investors must keep in mind.
At the same time, weakening credit conditions are making life tough for companies that are reliant on debt to fund capital investments or capital returns in the form of dividends and buybacks.
It’s also predicted that global trade and capital flows have peaked. This is as a result of technological innovations such as 3-D printing and advanced robotics, along with narrowing labour cost differentials, undermining international trade. This will likely lead to a parallel decline in direct investment flows.
It’s impossible to talk about emerging threats to the global economy without exploring the impact of China on international markets. It is now capturing market share further up the value chain through innovation. China’s R&D spending as a share of GDP has risen from 0.6 per cent a decade ago to close to 2 per cent now, surpassing the EU’s R&D spending.
China’s patent registration has never been higher globally and its education system boasts the highest share of graduates globally. Given China’s ability to build scale, reduce cost, learn, copy and compete, investors not invested in Chinese stocks that are exposed to these themes, or not invested in China at all, could be negatively affected on multiple fronts.
Turning to industries that are under threat, one sector that is under pressure is auto manufacturing. Slowing global growth is about to collide head on with capacity increases in this market in China and North America. Concurrently, the global auto industry is about to become much more complex technologically and strategically. Some of the headwinds these companies face include CO2 regulations, electrification, connectivity, autonomous cars and new market entrants.
Traditional media is another sector under threat. The consolidated media landscape is being replaced by new business models, distributed content generation, ease of mass distribution, in house data analytics and segmentation. Power in this market is shifting to content owners, not distributors.
Telecommunications is also undergoing a period of change. Bundling services is at risk from content owners who are bypassing traditional channels and adopting a pay-per view model. The physical infrastructure the traditional media companies own will remain a competitive moat, but in an increasingly commoditised sector.
Turning to financial services, a threat to existing businesses in this sector is not keeping up-to-date with technology. The incumbents have leading positions and are capable of meeting strict regulations. But they are susceptible to competition from low-cost alternative business models offering analytic-based products, targeting previously protected segments such as wealth management and offshore funds transfers. Insurance is also facing increasing competitive and investment pressures, as well as business complexity as technology starts to enable enhanced risk assessment, personalised pricing, reducing the competitive advantage of incumbency and facilitating new market entrants.
Overall, the global economy is in a period of flux, and it pays to be aware of new commercial dynamics when investing.
About the author
Andy Gardner, Investment Manager, Global Equities.
Andy is a leading member of AMP Capital’s Global Equities capability which focuses on identifying high quality companies that create value in the long term by understanding their competitive advantages and their ability to benefit from structural change and secular trends